40 years ago, Gordon Moore started the silicon chip revolution with his Moore’s Law. Today, Whitehead’s Law is driving the outsourcing revolution.
When I started my media career in Silicon Valley in 1982, one law reigned supreme:
When Gordon Moore published his groundbreaking article, he plotted seven data points showing the year-overyear increase in the number of transistors per chip. The number seemed to double every few years. So he extrapolated predicting the trend into the foreseeable future. With those seven data points,
In Table 1, I have charted the actual cost savings realized by Fortune 1000 clients who have fully-implemented HRO and FAO projects and have reported their savings (and costs) for the years 1995 to 2005.
Putting Whiteheads Law out there is not without its risks. These risks are similar to those faced by Gordon
However, the productivity progress that outsourcers have recently made is truly astounding. For example, in employee benefits administration today, no employers in-house department, not even 1.3 million-employee Wal-Mart, can rival the savings delivered by big benefits players such as Hewitt, Towers Perrin (now ExcellerateHRO), Watson Wyatt, SHPS, CitiStreet, and others. In-house employer and accounting services are so out-gunned by their outsourced counterparts that even metrics guru Greg Hackett (founder of the Hackett Group, now part of AnswerThink) tells HR and finance leaders to stop measuring, and start outsourcing.
The savings magnification effect that Whiteheads Law predicts for the next 30 years is driven by three factors. First, the latest version of HR and finance information technologies are much more efficient than earlier versions. And these new systems are nearly always being sold to aggregators and providers, rather than directly to in-house departments. Very few in-house data centers can get the capital expenditure or budgets approved for such investments. So the outsourcers have the better mousetraps and will continue to out-gun the in-house guys.
Second, all the operating talent is going to the provider side of the ledger. People who really want to make a career out of continuous administrative operating improvements are on providers payrolls, not sitting in an HR or finance department. And third, competition among providers will continue to drive price and performance improvements at a pace far greater than in-house functionaries could ever hope to achieve.
You can believe Whiteheads Law or not. After all, it is only based on 10 years of historical data points. Some have told me that it wont hold water because at those savings levels, providers will simply go out of business. But that is also what was said about the PC business 20 years ago, and MIPS keep going up while the prices just keep coming down. The smart money will avoid betting against Whiteheads Law